Sri Lanka's political outlook shaky, whoever wins knife-edge election

A police officer stands guard among images of Sri Lankan President Mahinda Rajapaksa during Rajapaksa's final rally ahead of presidential election in Piliyandala January 5, 2015. REUTERS/Dinuka Liyanawatte

By Shihar Aneez and John Chalmers

COLOMBO (Reuters) - In a measure of how far Thursday's presidential election in Sri Lanka has become a knife-edge contest, diplomats here have been checking the rules in case of a dead heat: according to a 1981 act, the rival candidates would draw lots to settle on a winner.

Until very recently, few would have predicted such uncertainty, not least President Mahinda Rajapaksa, who called the election two years early, confident that - despite his waning popularity - he could win an unprecedented third term.

The worry for investors is that the political and policy outlook will remain shaky even after a victor has been declared.

"Whoever loses ... will be presented with an opportunity to regroup in the parliamentary elections that could come within a few months of the presidential polls. And whoever wins will face the challenge of mending a polity in urgent need of being brought together," Alan Keenan, of the International Crisis Group, wrote in a blog this week.

"In short, Sri Lankan politics are almost certain to remain volatile in the months ahead."

Western nations are quietly keeping their fingers crossed that Rajapaksa's trusted astrologer, who advised the president on the most auspicious moment to go to the nation, got it wrong.

Diplomats believe that Mithripala Sirisena, once the president's health minister and now his audacious challenger, could bring a thaw in relations and trade with Europe and the United States that frosted over as Rajapaksa rebuffed Western lectures on human rights and embraced China.

They hope, too, that Sirisena will cool tensions between the country's Sinhala Buddhist majority and its minorities. Not only is he the common candidate of the usually fractious opposition, he also enjoys the support of the main party representing ethnic Tamils as well as a Muslim party that deserted Rajapaksa.

The president, who built his popularity on winning the 26-year civil war with Tamil separatists in 2009, has sought to paint his rival as a national traitor.

But while Sirisena, a Sinhala Buddhist, may be more inclined to reconciliation with the Tamils than Rajapaksa, he has made it clear that he will be just as resistant to calls for an international probe into possible war crimes by government forces during the horrific climax of the conflict.

POPULIST POLICIES

Sri Lanka's economic growth has averaged around 6.8 percent a year since Rajapaksa was first elected in 2005. External debt has declined, the inflation rate has remained in single digits for 71 months, and the budget deficit is at a 37-year low.

Despite that, the economy has become increasingly dependent on China and major multinational investors are staying away.

One explanation for that apparent contradiction, some analysts and opposition politicians argue, is that economic indicators are manipulated to present a rosier picture that will bring lower rates on foreign loans and attract investors. Rajapaksa's government rejects their allegation.

"In Greece, we saw all the data - including debt and budget deficit - changed after the government change," said Harsha De Seiva, spokesman on economic affairs of the opposition United National Party. "We will reveal the real numbers to the public and work towards a social market economy with a level playing field for all."

Even if the economy is as healthy as official data suggest, Sirisena would struggle to take advantage of it as president because he would answer to a motley coalition of ethnic, religious, Marxist, and centre-right parties. Already he has promised voters more subsidies and higher welfare spending.

"The only thing that could unite all parties under his coalition is populist spending," said Sasha Riser-Kositsky of the Eurasia Group. "The populist policies will derail the country's fiscal consolidation plan."

Sirisena's plan to scrap a $1.5 billion deal with China Communications Construction Co Ltd and a $400 million casino project of Australia's Crown Resorts Ltd will add to concerns that the economy will suffer.

Sirisena has pledged to hold a parliamentary election within his first 100 days in office, but Riser-Kositsky said this was likely to trigger a break-up of his coalition, denting the chances of a drive for economic reform.

According to one of many rumours swirling in Colombo on the eve of the vote, Rajapaksa might disband the current parliament if he looks set to lose, derailing his rival's 100-day plan for political reform.

If Rajapaksa wins, it is likely to be with a slender margin thanks to popular dismay with perceived government corruption and nepotism, and he will be weakened by recent defections of lawmakers to the opposition.

He, too, may fall back on populist policies.

"Rajapaksa won't be able to decide what he wants as he did in the past," said a Colombo-based political analyst who asked not to be named. "His own party will question him and he will not be able to take strong political and economic decisions."